By: Steven B. Haley, Esq.
Adleson, Hess & Kelly

INTRODUCTION

A common practice has developed in connection with nonjudicial foreclosures to have a new trustee sign a Notice of Default as agent for the beneficiary and to later substitute the trustee pursuant to the requirements of Civil Code ß 2934a. This is done in order to meet the ever-shrinking time restrictions imposed by Fannie Mae and Freddie Mac. On August 14, 1998, Fannie Mae issued Release 98-06 to its service providers. Release 98-06 required that, in nonjudicial foreclosures in California, any substitutions of trustees must be recorded prior to the recordation of the notice of default.; and that the notice of default must not be prepared and recorded by a person or entity that was not the trustee of record.

Release 98-06 is a policy statement; it is not a statement of law. It is inconsistent with applicable law regarding what is permitted in connection with substitutions of trustees under California law. However, Release 98-06 does provide us with an opportunity to review the requirements for substitutions of trustees in the nonjudicial foreclosure context.

The trustee is designated at the time that the deed of trust is executed. If the trustee remains the same throughout the nonjudicial foreclosure process, that trustee will arrange for the mailing, recording, and posting of the Notice of Default ("NOD"). At the conclusion of the three month NOD period, the trustee will arrange for the mailing, posting, recordation; and publication of the Notice of Trustee's Sale ("NOS"), conduct of the sale itself, and issuance of the trustee's deed upon sale. A substitution of trustee is required when the beneficiary replaces the original trustee. Substitutions of trustees are subject to the requirements of California Civil Code ß 2934a.

If the beneficiary decides to substitute a trustee prior to the Notice of Default, it is not necessary to provide copies of the substitution to any parties. The substitution is effective upon recordation, and the substituted trustee is free to proceed with processing the nonjudicial foreclosure. (ß 2934a(a)(4).)

Is the NOD required to be recorded solely by the trustee? No! Section 2924(a) provides that the NOD may be recorded by the "trustee, mortgagee, or beneficiary, or any of their authorized agents". Thus, not only may the trustee record the NOD, but also the beneficiary or any of their "authorized" agents.

Section 2924c(b)(1) sets forth the requirements for the contents of the NOD. The NOD is required to include the name, mailing address, and telephone number of the beneficiary where reinstatement is possible. (ß 2924c(a)(1) & (2).) It does not require inclusion of the name, mailing address, or telephone number of the trustee, but it may be a better practice to include at least the identifying information regarding the original trustee in the NOD.

When the beneficiary substitutes the trustee after the recordation of the NOD, but prior to the recordation of the NOS, ß 2934a(b) sets forth certain requirements that must be satisfied. Prior to the recordation of the substitution, the beneficiary is required to cause a copy of the substitution to be mailed to the trustee then of record and to all persons to whom a copy of the NOD would be required to be mailed by the provisions of ß 2924b. The mailing must comply with the requirements set forth in ß 2924b. The substitution is effective upon the compliance with ß 2934a(b).

Who is authorized to record the NOS? Section 2924(c) authorizes the "mortgagee, trustee or other person authorized to take the sale" to give notice of the sale. Unlike ß 2924(a), which allows the beneficiary to record the NOD, ß 2924(c) does not include the beneficiary in the list of persons authorized to record the NOS.

If a substitution is made after the NOS has been given, the NOS process must be redone. over again. If a substitution of trustee occurs after the recordation of the NOS has been given and the trustee proceeds with the scheduled sale without stating the substituted trustee's name, street address, and phone number, any such trustee sale is void. (ß 2934a(c).)

Fannie Mae Release 98-06 states the following:

Release 98-06 raises a number of scenarios. The first involves recording the NOD without the knowledge of the then trustee of record. As noted above, the statute does not limit recordation of the NOD need not be recorded solely by the trustee of record. It may be recorded by the beneficiary or by any authorized agent of the beneficiary or trustee. A similar statutory pattern applies to mailing a notice of default. (ß 2924b(b).) Any person, including the soon-to-be-substituted trustee may record the NOD as long as he or she is acting as an "authorized agent" of the beneficiary (as provided for in ß 2924(a)). The statement contained in Release 98-06 to the effect that it is improper for someone other than the trustee to record the NOD is simply incorrect.

The second scenario raised by Release 98-06 is that, if the NOD names the new trustee, that new trustee is acting without power (under Section 2934a of the California Civil Code) until the substitution of trustee is recorded. A new trustee does not undertake the powers and responsibilities of a trustee under a deed of trust until all of the requirements of ß 2934a have been satisfied, including recordation of the substitution of trustee.

Fannie Mae seems to be concerned that, if a NOD identifies a new trustee prior to the time that the substitution has occurred in compliance with ß 2934a, then the NOD might be subject to attack. Technically, the trustee under the deed of trust is not required to be identified in the NOD. Since most of the acts at the NOD stage may be performed by any authorized agent of the beneficiary, recording and mailing the NOD may not be invalid simply because the authorized agent is misidentified as the trustee. (This assumes that the "new" trustee in so acting is in fact authorized to act by the beneficiary.) Certainly, a better practice is for the party recording mailing the NOD to be identified as the agent for the beneficiary, and not be identified as trustee until the requirements of ß 2934a have been satisfied. Nevertheless, the misidentification by itself should not render the NOD invalid.

Finally, Release 98-06 is completely inaccurate to the extent that it implies that a substitution of trustee may not occur following recordation of the NOD. Section 2934a(b) specifically provides for the substitution of a trustee following recordation of the NOD and prior to the NOS.

The NOD may be recorded and mailed by the beneficiary, the trustee, or by any of their authorized agents. Prior to recordation of the NOD, the trustee may be substituted simply by recording the substitution of trustee. Since ß 2924 permits recordation of the NOD by the authorized agent of the beneficiary, it is not necessary that a substitution of trustee occur prior to the recordation of the NOD. A substitution of trustee may in fact be recorded subsequent to the recordation of the NOD and prior to the recordation of the NOS, as long as the requirements of ß 2934a are satisfied.

If a trustee is substituted after recordation of the NOS is given, then a new NOS must be noticed; a sale conducted under the original NOS is void.

This article should not be viewed as an excuse for Fannie Mae authorized servicers or designated trustees to ignore Fannie Mae's requirement that the substitution of trustees be recorded prior to recording the NOD. Those servicers and designated trustees acting on behalf of Fannie Mae may be bound by contract to comply with the Fannie Mae requirements. Nevertheless, the statements contained in Fannie Mae's Release 98-06 should not be viewed as accurately setting forth California law regarding the timing and effectiveness of the filing of with respect to substitutions of trustees in the nonjudicial foreclosures context.